High Earners might not be looking forward to next year. In April 2010 they face the prospect of a 50% income tax rate, increased National Insurance Contributions and reduced tax relief on pensions.
From 6 April 2010 the new top rate of tax of 50% is introduced for those earning above £150,000. At the same time those who earn over £100,000 will be faced with the withdrawal of their personal allowance. This means that for those who earn between £100,000 and £113,000 they will be paying an effective tax rate of 60%.
Some careful planning now could help high earners mitigate the impact of these changes. For business owners, this is a particularly crucial issue as there are a number of different ways of extracting value from a business, which attract different levels of tax. Within a company, directors have the options of taking dividends, receiving cash bonuses or paying additional pension contributions.
Owner managed companies may quite simply wish to consider increasing their normal dividend levels between now and 5 April 2010 to ensure tax is paid on earnings at the current rate for dividends of 32.5%, rather than the new rate of 42.5%, which comes in on 6 April 2010. Several chairmen of family companies have been publicly quoted as commenting that they are taking steps to limit their exposure to the new higher tax rates, and were planning similar moves to pay dividends and staff bonuses ahead of the tax rise. However, beware, the chancellor Alistair Darling is likely to announce further crackdowns on tax avoidance in his pre-budget report which is to be given on 9 December 2009.
The forthcoming changes to personal taxation mean capital and corporate taxes are now significantly lower than income tax, and taxpayers need to consider whether alternative methods of receiving income may now be more effective, including bringing forward income, deferring expenditure and restructuring investments to realise capital rather than income.
With personal tax rates returning to levels not seen since the 1970s, high earners need to begin planning now for how they can minimise the effect of the proposed changes it is well worth seeking advice.
Disclaimer: This article is for general guidance only. All taxation planning should only be undertaken after appropriate professional advice. George Hay Chartered Accountants are registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales.
Biggleswade Chronicle - 4 December 2009